There are lots of reasons why getting comfortable with all the confusing, scary “tax stuff” will benefit you when you’re self-employed. The most obvious being… you legally have to pay taxes. So if you’re not paying quarterly estimated taxes, you’re gonna be writing a fat check at tax time that might include late payment penalties. (Yikes!) But more than that, once you understand the basics, you can start to develop processes that let you take care of business quickly and confidently. And third, when you fully understand your tax obligations, you can keep them in mind when you’re planning for your business and pricing your products and services.
Generally speaking, self-employed individuals pay more in taxes than other taxpayers in the United States. (That’s because you pay both the employer and employee portions of social security and medicare. Bummer.) According to the IRS, you need to pay quarterly estimated self-employment taxes if you are going to bring in at least $1,000 in net income that year and are a sole proprietor, independent contractor, freelancer, owner or member of an LLC, or are otherwise in business for yourself, including part-time.
In this guide, we’re going to walk through the basics so that you can set up a system for paying your federal (and state and local, if applicable) quarterly estimated taxes with confidence.
At the federal level, quarterly estimated tax payments are made up of two things:
Federal income tax gets a bit confusing because certain amounts of your income are taxed at different rates, depending on your tax bracket (which is based on your yearly income). Here’s a helpful visual from NerdWallet:
Also, your federal income taxes are calculated on your taxable income, not your net income, which means you get to take either your standard deduction (which is $12,950 for singles, $25,900 for married couples filing jointly in 2022) or your itemized deductions, if greater, before calculating your tax. Whether you itemize or not, when it comes time to do your federal tax return you will get a deduction for 50% of the self-employment taxes you pay.
At least for me, being self-employed and running a small business means it’s hard to predict how much I’m going to make that year. But don’t worry, estimated tax payments are just that: estimated! When tax season comes around, you may have to pay a bit more, or get a fun refund! Later in the guide, I share my method (with a real example) for estimating as close as I can.
Self-employed people also have to pay quarterly estimated income tax to their state’s department of revenue, and many cities and municipalities also levy income taxes. Every state is slightly different, so I’ll share more information on tax rates by state later in this guide. Generally speaking, state tax rates are lower than federal, ranging from 3% to 13.3%. Bet you can’t guess the proud owner of the 13.3%... (cough cough, California).
In 2022, federal quarterly estimated taxes are due 4 times throughout the year:
Most states’ and municipalities’ due dates are around the 15th of April, June, September and January. But more information on where to find exact dates will follow.
I like to mark my calendar on the day each of these are due, as well as a week or so beforehand to make sure to have my calculations and payments ready on time.
I’d recommend finding these documents and saving them to a folder on your computer for easy access each quarter. Here’s what you’ll need:
I highly recommend you thoroughly read through the 1040-ES worksheet as well as your state’s worksheet in order to make these calculations. However, since I’ve been doing this for several years and I have an accountant who will make sure I’m square during yearly tax time, I have a more simplified way of estimating my quarterly payments that I’ll share with you in this section.
First, I take a look at my monthly revenue and expense spreadsheets for my business and add up the total revenue for the quarter, then the total expenses for the quarter. I subtract the expenses from the revenue to find my net income.
I multiply that by 15.3% to calculate my federal self-employment tax.
This is now much I owe for the quarter in self-employment tax. Quarterly income tax is a bit trickier to calculate, because it’s dependent on your tax bracket, which is dependent on your yearly income. Here’s how I do it:
First, I make my best guess of what I’m going to make in the calendar year. I usually start with what I made the year prior, and adjust from there. For this example, let’s say I’m predicting to have $50,000 in taxable income (after the standard or itemized deductions).
Then I determine my tax bracket based on that amount. With a taxable income amount of $50,000, I would fall into the 3rd tax bracket. ($4,664 plus 22% of the amount over $40,525)
Based on this, I would owe $6,748.50 for the year.
At the end of quarter 1, 2, and 3, I’ll add that $1,687.13 to 15.3% of my actual quarterly taxable income and that’s what I’ll pay to the IRS. (It’s all paid on the same 1040-ES form.) If I’m clearly on a path to make significantly more or less than the prior year, I adjust accordingly.
At the end of Q4, I’ll know my actual taxable income number. So I’ll re-do the calculation in the appropriate bracket and make up for any over- or under-estimate in the 4th quarter payment.
Each state and municipality has a different tax rate. Some tax rates are fixed, and others are graduated (meaning as taxable income increases, it is taxed at a higher rate.) Some states and municipalities don’t require you to pay income tax at all! Find more information about your state tax rates here. To find out whether your city or municipality collects an income tax, google your municipality + local income tax.
To calculate your quarterly estimated state or local income tax payment, start again with your net income for the quarter.
Multiply this number by your state’s and/or municipality’s tax rate and you have your payment amounts!
Follow the instructions in the respective worksheets for the ways to submit payment. On the Form 1040-ES, these instructions begin at the bottom of page 3.
In my experience, paying your federal estimated taxes online is simpler, but does cost a small fee (around $2.20). You can also mail a check along with your filled Form 1040-ES to the IRS. Depending on where you live, you’ll be mailing this to a different office, so check page 5 of the form for the correct mailing address.
Every state is different in terms of how you can pay. A good place to start for this information is always your state’s department of revenue website. To find that site, just google your state + department of revenue.
Once you’ve submitted your payments, be sure to document your proof of payment. If you paid online, download or screenshot your receipt. If you sent a check, keep a copy of your filled forms in a folder labeled “2022 Estimated Taxes.”
Why is this important? When tax time comes around each year, you’ll need to send your CPA (certified public accountant) proof of payment for each quarter you paid estimated taxes. You may also use a service like turbo tax to do this yourself, where you’ll be asked to report your estimated payments.
When I send things over to my accountant, I like to send them with a written summary that includes the following information:
The more you keep track of this stuff, the better off you’ll be when tax time comes around. I know it can be overwhelming! It took me a couple years and several phone calls with my CPA to really get the hang of this and create a process that works for me. But now every year it goes a bit smoother and I feel confident I’m managing this area of my business well.
I hope this guide can be a resource you come back to whenever you need it. Good luck, and get that bread!